When parents, grandparents, or other family members want to give young kids a head start financially, they use a variety of financial tools, including a UTMA account. This custodial account, defined by the Uniform Transfer to Minors Act (UTMA), holds cash and other assets gifted to minors. Although the child immediately has ownership of the assets, he or she can't access them until turning age 18 or 21, whichever age the child's resident state dictates.

UTMA Account Restrictions

In many cases, families discover, years later, that the restrictions of a UTMA account were not what they intended when they made a gift to the minor child. Often, this happens when family members or non-family adults have given stocks, bonds, mutual funds, real estate, private businesses, or other financial assets to a child within a UTMA account and then find that, upon reaching the age of consent (21 years old in most states), the child has not yet matured financially and might misuse the money due to a lack of knowledge or discipline.

The child might make choices such as foregoing college to spend the money on a business startup or other speculative venture that goes against the original intentions of the financial gifts.

Alternatively, perhaps the family has a financial hardship, an additional child with special needs which requires more resources, or other children among which they'd like to split the assets. Finally, some parents perhaps didn't understand the account fully when setting it up, and have later realized its restrictive nature.

What options are available if you find yourself in this position? A few, although each has its share of issues. Proceed with caution because you could trigger tax consequences, subject yourself to a lawsuit, especially if an ex-spouse disagrees with how you treat the child's assets, or damage your relationship with the child if using their assets in a way that goes against their wishes.

Scenario 1: Your Child Is Too Young to Access Their UTMA Assets

In this case, you have an opportunity to engage in what some experts have called "substitution." The money in a UTMA belongs the child, that doesn't change. However, the custodian has the authority to spend it for the benefit of the child, using his or her reasonable judgment.

To work a substitution strategy, you as the custodian can start spending the UTMA money on expenditures you would normally cover out of pocket for your child. This includes things like piano lessons, school trips, school tutoring or cosmetic improvements such as braces. It's important to keep records of the expenditures in case you need to prove later that they were indeed for the benefit of the child.

Every time you write a check against the UTMA funds that you would normally have paid out of your own account, write a check in the same amount to a more flexible trust fund that's been set up with the provisions you desire. These provisions could require that the child maintain a certain GPA, use the funds toward education expenses only, or not have access until her 30th birthday, for example. Be aware that this could be tricky legally; you may need to file a gift tax return if you transfer more than $14,000 out of the UTMA, among other things.

Project out your child-related expenses and plan how many years it will take to draw down the balance of the UTMA while building up the balance of the new trust fund, or another instrument such as an annuity, Family Limited Partnership (FLP) or 529 college savings plan.

For example, if you chose to set up an FLP, you as the custodian would take the UTMA money and buy limited partnership units that you would control through liquidity restrictions in the FLP's operating agreement. If you opt for an annuity contract, the money you put into it would convert into a series of payments meant to last for the child's entire life.

Scenario 2: Your Child Is Old Enough to Take Possession of the UTMA Account Assets

If you decide to withhold the money from your child, perhaps spending it on your own needs or trying to conceal it, the child may decide to sue you. Under the terms of the UTMA, the account's money belongs solely to your child. It consists of irrevocable, meaning final, not-able-to-be-changed, gifts.

If you confiscate the funds, you have effectively taken them illegally from your child. Although you may have done so with the best intentions, like most parents who do so for the sake of protecting their child from wastefully spending the money, it doesn't matter. In most cases, the child may not pursue a civil claim, but if your relationship with the child goes south, you're exposing yourself to a certain degree of risk.

If the child can make a reasonable claim in court, that you have breached your duty by restricting him or her from the assets they owned, you could be in for a long, perhaps bitter, fight with no guarantee of winning. You may have asked your child to gift the money to you, but once she's turned the age of majority, she can change her mind and sue to get the money back.

You could rely on the goodwill of your relationship and use the power of incentive. If you have a considerable estate or plan on continuing making gifts to the child, you can ask them to sign over their UTMA assets to a restricted holding such as the FLP or annuity, with the caveat that if they don't, they won't ever receive any additional money from your larger estate.

Finally, it might make sense to just let go and trust your child with the money, letting the chips fall where they may. Your child might spend the money responsibly after all, and come back to you years later to tell you how much it meant for you to put your trust in them.

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